Creating disruption is a highly sought after capability due to the promise of profit and longevity through innovation and growth. Multiple disruptions over time can extend corporate success beyond market cycles. Many books seek to crack the code of repeat innovation and capitalizing on market shifts.
Adam Hartung’s prescription to the problem is to break what he calls “lock in”, deeply entrenched business practices that tie a business to past success and predictable outcomes. In Create Marketplace Disruption, Hartung zeroes in on the “defend and extend” strategy that many companies use to protect their core business. Hartung finds set of root causes, consequences, and remedies to this situation that are similar to Clayton Christensen’s Innovator’s Dilemma.
Lock Ins combine to create a “Success Formula”, the corporate DNA that institutionalizes successful business practices, but prevents new approaches from being taken. By systematically challenging and breaking “lock in”, a company can enact a new success formula and effectively disrupt itself. Hartung prescribes a set of goals and perspectives that include creating “white space” that eventually incubates a new Success Formula.
Each of these concepts plays out within a business lifecycle, the famous “S” curve. The ideal implementation of this model is “jumping the curve” in which a new line of business or product is introduced just as a previous revenue stream is maturing. Few companies can achieve this goal and Hartung’s book identifies what he believes are the root causes for this.
Hartung’s business lifecycle begins with Infancy (“Wellspring”), then moves through Adolescence (“Rapids”), Maturity (“Flats”), Decline (“Swamp”), Old Age (“Whirlpool”). The critical point on this curve is the “reinvention gap” between the Rapids and the Flats where businesses must create disruptive initiatives to overcome the eventual decline of current products and services. He notes that 3 out of 4 companies experience negative growth after reaching a stall point.
Hartung adds disruption to the common definition of business success which includes hard work, diligence, tenacity, goal setting, planning, and execution.
People don’t like to undertake Disruptions, but they are not nearly as painful as feared. Disruptions are like vaccinations.
Business education is steeped in optimizing execution as opposed to managing innovation.
This book offers a diagnosis of why managers, when faced with market discontinuities and competitive threats, double-down on current practices and, in doing so, hasten their own demise. By focusing on the core and avoiding damages to existing business models, corporate leaders blind themselves to new opportunities and future growth potential. This mindset is opposed to the concept of creative disruption, introduced by Joseph Schumpeter, which describes the damage innovation can unleash on the status quo.
Defend & Extend
At its core Defend & Extend Management overlooks the reality that organizations compete in dynamic markets. Defend & Extend produces Success Formula enhancement only as long as the environment does not change. D&E relies on static markets.
Hartung identifies the root cause of failures to innovate and survive as the “defend and extend” approach. This is a similar principle as Clayton Christensen’s “innovator’s dilemma” in which a company is naturally attracted to retaining its core, high profit business and cedes lower profit market segments to disruptive newcomers.
The Success Formula
For most people and organizations, success is not about achieving goals. Success is defending and extending each day, each week, and each month what was done in the past.
The Success Formula is essentially the business model and internal processes that have gotten the company where it is today. A company is successful because it has found a winning formula for earning profit in the marketplace.
Success Formulas are comprised of Identities, Strategies, and Tactics. Identities (“who are we?“) are the foundation of Success Formulas and, although often unspoken, can serve to constrain innovative thinking by limiting the domains in which a company engages. These deep definitions (“we’re in the hardware business“, “we sell software“) cascade to the Strategies and Tactics that make up the daily operations of a business.
Because D&E Management is Locked-in, success becomes operating the Success Formula rather than producing results. Managers aren’t measured on market results, but rather how well they operate inside Lock in, supporting the old Success Formula.
If the Success Formula is the villian in Hartung’s book, then Lock-Ins are its henchmen. Success Formulas cannot be changed directly; rather, they must be deliberately dismantled one Lock In at a time. Lock Ins are specific business model elements, metrics, incentives, rewards, behaviors, and operating practices that serve to collectively reinforce and perpetuate the Success Formula. The first step in removing Lock In is to identify biases and processes which support the core business.
Attacking a competitors’ Lock In is also a key strategy as it exposes potential weaknesses in their Success Formula and can give insight into new approaches and market opportunities. Being tuned into competitors’ Lock In gives businesses better sensitivity to their own assumptions and constraints.
The Phoenix Principle
All success formulas hit the Flats so all need to be evolved. The Phoenix Principle must become a way of life.
Phoenix Principle companies are not afraid to fail.
The Phoenix Principle is Hartung’s code for the continual process of relentlessly destroying Lock Ins and creating new White Space initiatives to move the company forward via disruptions. Hartung gives many examples of companies who spread their bets by investigating alternate products and services as White Space initiatives. He defines a Phoenix Principle company as one that is “in the business of addressing market challenges by migrating toward customer demand and building Success Formulas that produce above average returns.”
This is where new Success Formulas are born. White Space is a disruptive opportunity involving new products and new customers–much like the new markets/new products quadrant of the Ansoff Matrix. Hartung notes that White Space is not a “skunk works” project, rather it’s a highly visible project that is acknowledged to be the kernel of the company’s new business approach. White Space not only creates the future, its job is also to provide a bridge backwards to existing products/services and sales/marketing strategies. For White Space to be successful, it’s important that the team is given explicit permission to violate current Lock Ins. Otherwise, managers spend more time engaging in battles with Lock Ins than they do getting the new product or service out into the market. White Space teams need to be adequately resourced, highly accountable, and remain separate from the core business. Hartung points out that many times a White Space project is sold off to gain financial resources for fueling the core business (defend & extend strategy).
Success, Hartung says, is about “keeping the Success Formula evergreen”, rather than defending and extending it until it completely loses steam. The strategies listed in the book are meant to support the continual reinvention that increases survival rates for innovative companies. Hartung is careful to point out disruptions cannot be planned, rather they must be identified through a process of attacking Lock In and providing White Space for multiple new initiatives. “Change comes from..altering Lock Ins” in behavior and structure.
In the video below, Hartung discusses why the Defend & Extend approach doesn’t work in a global environment of rapid market shifts. He says one of the key differences between companies whose growth stalls and those whose growth doesn’t stall is how they approach planning. The winning approach is to look forward with scenario planning rather than looking at past performance through the rear view mirror. Hartung also emphasizes not asking your customers to plan for you and paying attention to competitors who are on the fringe. “Strategic customers” typically are large ones that are well served by existing Success Formulas so they are unlikely to be signposts for the future. Finally, success requires comfort with internal disruption and providing White Space for those disruptive efforts.
Innovation isn’t confined to break-out, market-creating, blockbuster products and services. There are innovation types available for each phase of the category life cycle, from growth through maturity and decline, to end of life. The innovation types for each life cycle phase are grouped according to four value disciplines that identify strategies which can be activated to achieve new offerings, increased customer service, cost efficiency, and improved portfolio management. In Dealing with Darwin, Moore also maps innovation strategies to two primary business architectures: complex-systems and volume-operations. Considering innovation along these two lines allows a company to select its most effective strategy.
The single most important act of strategy leadership is to select the innovation vector upon which your company will develop its sustainable competitive advantage—its core. To do this properly requires a deeper understanding of the properties of each of these innovation types.
Moore identifies five life cycle categories for products and services: emergent, growth, maturity, decline, and end of life. Disruptive innovation, the type of innovation which is most often associated with high technology, occurs in the emergent category. This phase is described in his book, Crossing the Chasm, and involves the leap from early adopters to mainstream buyers where it enters the growth phase. Although disruptive innovation is highly desirable, it is not the only type of innovation available to companies. Innovation types span the entire category life cycle and can contribute to overall corporate growth. In Dealing with Darwin, Moore devotes one chapter to each life cycle phase and its innovation strategies. This model of innovation broadens your outlook on opportunities for growth and new offers.
Moore overlays the category maturity lifecycle with the four value disciplines described by Michael Treacy and Fred Wiersema in The Discipline of Market Leaders. The four disciplines are: product leadership, customer intimacy, operational excellence, and category renewal.
This group of innovation types is characterized as very powerful, expensive and risky. Therefore, they must be executed in high growth markets to realize the necessary returns and market share wins. Here’s Moore discussing this zone.
Disruptive Innovation – Products and services which create technology discontinuities and new market categories are part of this set. Existing standards and value chains are over-turned in favor of new approaches. Digital media (music, film) and social media networks are examples.
Application Innovation – Finding new uses, new audiences, and re-combining existing functionality are attributes of this category. Although standards change, existing value chains are disrupted. Examples from the book are the application of Macintosh computers to desktop publishing and using fault tolerant computers to run ATM networks.
Product Innovation – Here, existing products are improved through functionality and usability for existing markets. Success is achieved through time to market and patent protection. Improvements such as wireless connnectivity in laptops, cameras in cell phones, and hybrid engines in cars are examples of product innovation. Other examples are moving
Platform Innovation – Platform leaders create foundational or ingredient systems on which third parties can build further value. Success here relies on architectural leadership, relationship building, and creating benefits for the entire ecosystem. Famous examples are Intel and Microsoft.
This group of innovation types are less risky and less powerful, but can give a company money back through cost and efficiency savings. Due to its lower power potential, this group is better suited for mature markets where market share is more likely to be constant. Here’s Moore talking about the Customer Intimacy zone.
Line-Extension Innovation – Line-extensions introduce new sub-categories within existing offering groups. Much of the infrastructure stays the same, but user-facing features or packaging changes sufficiently to create novel products and services. Examples are SUVs for an auto manufacturer or laptops for a computer manufacturer.
Enhancement Innovation – This is a smaller, more targeted, modification or feature enhancement to an existing offering such as Teflon coating for pans or higher pixel ratings for digital cameras.
Marketing Innovation – Marketing innovation uses new or highly effective marketing campaigns such as viral strategies, social media, or crowd sourcing to outpace competitors.
Experiential Innovation – This category occurs most frequently in service offerings, or by adding a service to an existing product. Here the overall experience of a offering is enhanced through personalization, 1:1 attention, or a higher level of value add.
Like Customer Intimacy, the Operational Excellence zone is less risky and less powerful, but can give a company money back through cost and efficiency savings. Due to its lower power potential, this group is better suited for mature markets where market share is more likely to be constant. Here’s Moore talking about the Operational Excellence zone.
Value-Engineering Innovation – The goal in this category is to decrease costs in manufacturing / development for existing offers without changing their composition. Optimizing component parts and the overall assembly / creation process are tactics here.
Integration Innovation – This is the flip-side of value-engineering innovation–the customer’s cost of ownership is decreased by simplification and/or consolidation into a single entity that can be managed more effectively than multiple pieces.
Process Innovation – The goal of this type of innovation is to reduce waste and cost from processes that support and enable the offer, rather than offer itself. Inventory management and quality programs can be used here.
Value-Migration Innovation – This type of innovation is described in Adrian Slywotzky’s book Value Migration. Companies taking this approach will move away from segments of the value chain which are commoditized to segments which are richer in profit and growth opportunities.
Category renewal considerations come into play when a business is declining and must be wound down or immediately exited.
Organic Innovation – Re-positioning a company to a growth category is the goal of organic innovation. Examples are IBM moving from hardware/software to services and Microsoft moving into browser software.
Acquisition Innovation – This strategy equates to mergers and acquisitions, either as a buyer or seller.
Harvest and Exit – This decision effectively closes out a line of business.
Scott Berkun’s book The Myths of Innovation provides a great perspective on what goes on behind the scenes of innovative ideas. He pokes holes primarily in the notion of epiphany, the spontaneous, external, insight that hits you from nowhere. From there, Berkun questions whether innovation and new ideas are always welcome. He also lists several myths that are related to process of innovation and how it is practiced. The book challenges the notion that new ideas look great when the arrive fully formed and everyone cheers their delivery. This masks the truth that new ideas don’t present themselves as full products, are typically met with heavy resistance, and are the result of twisting paths of hard work by multiple contributors.
Berkun’s essential message is that hard work, incubation, non-linear progress, and a rich environment are the best circumstances for innovation to thrive. He defines innovation through the customer’s eyes and suggests that for something to be innovative, a customer must say “this represents positive change for me.” Can you say “we innovate every day”? If innovations are true discontinuities, then can they be regularly scheduled?
Big ideas are a small part of innovation
He argues that the idea of the random epiphany is a myth because ideas never stand alone. The analogy he uses is putting together a puzzle. Is there anything special about the last piece that completes the puzzle? We forget all the other pieces which had to be in place before the location of the last one was evident. The perspective that’s required for a new approach often takes a long time and a lot of curiosity to formulate.
People who keep themselves busy all the time are generally not creative — Freeman Dyson
Berkun explores the concept of epiphany and unravels it a bit to conclude that it’s important to be idle. Being still and taking time to see a problem clearly are important in the incubation process. Idle time leads to better incubation and allows connections to be made between ideas (puzzle pieces). The long chains of experimentation and invention that lead up to great innovation are aided by the ability to make non-linear and illogical connections. Most books on innovation note that the most powerful new ideas come from the intersection of unrelated disciplines. This intertwined network of ideas and individuals also puts into question the belief in the lone inventor who hears the siren song of a muse. He notes that acknowledgement of individual contribution to innovation is a recent invention itself.
Until the innovation is accepted, it will be questioned relentlessly.
Two interesting myths he identifies are the idea that people love new ideas and that the best ideas win. Berkun quotes Howard H. Aiken as saying, “Don’t worry about people stealing your ideas. If your ideas are any good, you’ll have to ram them down people’s throats.” This is a key myth of innovation–the belief that people are welcoming and ready for new ideas and change to enter their lives. The ability to execute in a highly competitive environment and timing are critical to broad market adoption that the best idea frequently doesn’t win. The best idea is the one that gets adopted. Berkun notes that ideas are rejected on the basis of emotional reaction, not pragmatic evaluation.
How else will new knowledge appear to us, if not as strange, bizarre, or incomprehensible experiences?
In the second half of the book, Berkun gives some advice for generating ideas, getting them out of your head and into the world, and how to recover from rejection and failure. He advises focusing on being good rather than innovative because “most products out in the world are not very good.” He articulates this thought in a great post at BusinessWeek called “‘Good’ beats ‘Innovative’ every time” which is about the obsession with innovation, in contrast with “just trying to be good.”
Innovation is often just as much about clear definition of the problem as it is about inspiration, which supports Berkun’s point that it’s usually “hard work in one direction” (often by many people) that actually results in an innovation coming to life. An innovator’s natural curiosity will motivate the relentlessness required to follow all the paths which lead to the realization of new ideas.
In this talk at Carnegie Mellon, Berkun identifies the myths of innovation and describes the reality of invention. He makes the observation that creative (innovative) people have specific habits related to idea generation and follow-up, including a low inhibition for considering what might otherwise be irrelevant ideas. That’s why he suggests asking what happened before the moment of epiphany to really understand the origin of an innovation. The habits and behaviors that lead to the moments of inspiration are more important than the moments themselves.
Innovation management is currently enjoying a lot of coverage in business books and is positioned at the latest corporate competitive advantage. Being known as innovative is the hallmark of success and differentiation in the market. As the outcome of innovation is typically a new product or service, the question becomes: “how do I most effectively generate new ideas which will translate into profitable and market dominating products?’ In Innovation Tournaments: Creating and Selecting Exceptional Opportunities, authors Christian Terwiesch and Karl Ulrich advocate a tournament model for the generation of successful ideas.
They point to the motion picture and pharmaceutical industries as examples of many product introductions leading to only a few successes. Likewise, they highlight American Idol as an example of a classic tournament whose purpose it is to identify a single performer from among thousands. Across many industries and businesses, the problem of generating, filtering, and finding profitable ideas from among many options. Moreover, once multiple projects are launched, there is a cost in managing and reviewing them. Projects which are “teetering on the edge of termination” consume excessive amounts of management time.
For a successful innovation, exceptions are the goal
Terwiesch and Ulrich argue that the best way to find great ideas is not to increase the number of ideas nor their quality, but to increase their variance. Its only by seeing the breadth and spread of ideas that one can determine which should rise to the top and command investment dollars. A predominant theme in business training is the elimination of variance. Efficiency and process-centric methodologies like Six Sigma attempt to standardize and homogenize processes and outputs. Although variance elimination and process optimization are king once an enterprise or product/service is up and running, during the creation process, the messiness of idea generation is what pays off.
Chaos increases new business. Order increases profits.
Innovation tournaments come in many shapes and sizes. The authors offer up several key choices to make as you design your approach:
- Open or closed? – Can anyone apply or is there a criteria in place to get in?
- Pure cascade or renewal and iteration? – Does the tournament proceed like a single-elimination sports competition or can ideas get refined and come back into the process?
- One or multiple rounds? – Does everything take place in one day or are there multiple rounds where the winner of one round proceeds to the next round?
- Absolute or relative filters? – What criteria are used to judge the entries? Absolute or relative?
Tournaments are, of course, the second best way to find the winning idea. The best way would be to implement a formula which selected the winning idea based solely on objective criteria.
In this video, Karl Ulrich describes two key levers for designing innovation tournaments. His first point is that as the number of ideas generated increases, the rate of quality increases rapidly, but then tapers off (i.e., based on his research the quality of ideas increases for the first 100-200 ideas, but does not improve substantially after that). His second point is that “variance is your friend” because it is “inexpensive to throw out the bad ideas.” This is a strong argument for open innovation. The book’s website offers spreadsheets and links to open tournament websites.
The discipline of design is aimed at the creation of meaning, according to Roberto Verganti in his book Design Driven Innovation: Changing the Rules of Competition by Radically Innovating What Things Mean. Design’s role is the creation of a conversation between a firm, its customers, and a critical network of “interpreters” who are engaged in discovery and shaping of new ideas. Verganti stays away from the traditional user-centered design paradigm in favor of a model which places the responsibility for product vision squarely on the firm and establishes a pivotal role for third-party interpreters in the design discourse.
From the perspective of the firm, key steps in the design discourse are listening, interpreting, and addressing. Listening is a common ingredient in any design process, but Verganti introduces the interpreting step in order to focus on generating the firm’s own vision and ideas for new meanings to be offered in the market. Addressing is likewise important in his framework because it is at this stage that the firm clarifies and refocuses the discourse with interpreters based on the firm’s vision. He stresses the participatory nature of design driven innovation as distinct from a more passive approach where requirements and needs are assumed to be latent within the customer base.
Market! What Market? We do not look at market needs. We make proposals to people.
–Ernesto Gismondi, chairman of Artemide
Verganti does not subscribe to the user-centered design philosophy because he believes that radical innovation of meanings can best be brought about by a design discourse based on a strong vision by the firm offering the product. Users can typically only tell you about what is lacking in their current context–it is difficult for a focus group to provide a compelling vision. While user-centered design is observational, design driven innovation is participatory and involves deep research and time needed to develop a radically new meaning. The ability to develop and sustain the critical relationships with external “interpreters” is another key characteristic of design driven innovation.
A lot of times people don’t know what they want until you show it to them.
There are two common innovation strategies: quantum leaps in product performance created by breakthrough technologies and incremental improvements enabled by key insights into the needs of users. The third way is to radically innovate meaning by using design driven innovation. Examples are lamp whose meaning is not just being a beautiful object but a light that makes you feel better or athletic shoes that have more meaning than being simply inexpensive versions of leather shoes. The meaning of coffee shops was radically changed by Starbucks as the company evolved the experience of coffee and created a “third place”.
The dimension of meaning that products encompass is as important as the utilitarian and functional attributes. Although design driven innovation cannot guarantee that a given meaning will be taken up by an audience, it does provide a foundation for creating the meaning that will equate to a “proposal.” The meaning that is contained within a product is more powerful than the utilitarian innovation which is enabled through feature and function improvement.
In this video (at :50) Verganti briefly describes design’s role in innovation
Here’s an interview with Verganti about the book
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In the first chapter of Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution Geoffrey Moore, author of the classic Crossing the Chasm, writes about the dynamics of innovation. He begins by identifying the primary motivation behind innovation: differentiation. In the absence of innovative products and services, offerings in the marketplace become commodities and compete purely on price. Innovation is what creates differentiated offerings and allows for attractive economic returns.
In addition to differentiation, there are three other outcomes from innovation: neutralization, productivity and waste.
The goal of neutralization is to eliminate negative returns. The mantra of neutralization is “seek good enough, not best in class.” Neutralization strategies aim to slow down competitors and decrease the amount of head start a competitor has in the market. The less time your competitor has as an exclusive provider, the less momentum they can generate. Examples of this outcome are SUVs (nearly all automotive manufacturers have an SUV as part of their lineup). Moore notes that “first in class, when not first to market does not earn results commensurate with the investment required.”
Productivity improvement is, for Moore, “essential to evolutionary adaptation because it frees resources that other forms of innovation can use.” A productivity outcome creates products or services in the market at a lower cost. As costs are saved, the freed up resources can be applied to other innovation initiatives.
Waste consists of three individual outcomes. The first is simply failure. Moore views this as a part of doing business. He says “if you lose a lot of bets, you probably ought to look into your betting process or change your bettors.” The second type of waste is over optimization, what Moore terms as “efforts that go [too far] beyond the neutralization goal.” But this is not the worst kind of waste. The worst kind of waste are successful projects which achieve differentiation of some sort, but don’t go far enough along the continuum of differentiation. He calls this “innovation underperformance” and asks the reader to try and recall a Chevrolet sedan from the past ten years. Then he contrasts Chevrolet with Chrysler PT Cruiser or a Corvette (all memorable cars even if you don’t care for their design).
Risk reduction mentality and lack of corporate alignment are to blame for innovation underperformance. Risk reduction is intended to sustain the status quo and existing environment. Moore calls this context. “There are penalties for failing to execute context properly, but no reward for performing it brilliantly. So there is no upside to warrant taking risk” writes Moore. Core, on the other hand, is a type of innovation that creates differentiation.
To succeed with core, you must take your value proposition to such an extreme that competitors either cannot or will not follow. That’s what creates the separation you seek.
Moore goes on to give examples of core innovation that were achieved with corporate alignment. He notes that in most companies, innovation efforts are isolated in separate business units and do not have the alignment necessary to create unassailable products and services. In these cases, “each of the breakaway companies is aligned end to end around a single value proposition.”
The failure…lies in the [inability] to prioritize a one line of innovation above all others.
Moore comes back to focus and prioritization as the two pillars of success in innovation.
In order to break away, we must overcome risk-reduction mentality and lack of corporate alignment. Neither is a natural act.
In this short video, Moore outlines the three main outcomes of innovation and describes how companies fail to achieve competitive separation from the pack.
In The Innovator’s Solution: Creating and Sustaining Successful Growth Clayton Christensen takes the disruptive innovation framework he developed in The Innovator’s Dilemma one step further by defining two types of innovations: Low-End and New-Market. New-Market disruptions are those that complete with “nonconsumption” because they are “so much more affordable to won and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a convenient setting.” He gives the personal computer and Sony’s first transistor radio as examples because both products were introduced to entirely new consumers–those who had not previously had any access to computing power or radios. Low-End disruptions such as steel mini-mills and Asian automakers work by entering the market as a “not good enough” solution to products and services that are being offered by incumbent providers. Christensen says that these two types of innovation can be used simultaneously by the same firm. Southwest Airlines provided both an alternative to established carriers (low-end disruption) and targeted people who were not currently flying (new-market disruption).
Christensen gives three sets of questions as a test for disruption:
- Is there a large group of potential customers who have not historically had the resources to do this thing for themselves and have gone without it or have needed to pay someone else to provide it to them?
- To use the current product or service, do customers need to go to an inconvenient, centralized location?
- At the low end of the market, are the customers who would want to purchase a product with less, but good enough, performance if they could pay a lower price?
- Can a business model be created which allows for attractive profits at the price needed to win the business of these customers?
Finally, he asks “is the innovation disruptive to all the significant incumbent firms in the market?” If the innovation is sustaining to any one of the established players, the odds are that company will more successfully implement it than a new entrant.
In the video below, Christensen describes two dynamics that play a role in disruptive innovations. First, there is share price, which includes not only a discounted present value of cash flows that are forseeable from the existing businesses in a company, but also “a get that investors are making that management team will make new growth”. He says that if a company achieves growth, then growth is already discounted into the share price and therefore the company needs to keep surprising investors on the upside.
He then defines two types of disruption: low-end and new market. Low-end disruption are low-cost business models which do the same thing as leaders. New market disruptions provide a simplifying technology that a whole new set of customers can use (personal computer made it affordable and simple). They are competing against non-consumption. Unwilling, unable to create new business model that had different cost structure that could compete successfully against non-consumption
It appears as if non-consumption is a small market, but in reality it is huge
The term “disruptive” is frequently used to describe successful businesses and business strategies, but Clayton Christensen has a specific definition of disruption in The Innovator’s Dilemma. For Christensen, disruption occurs when a firm enters a market by providing a “not good enough” solution to a problem that an incumbent company is already offering. Due to the incentives of capital markets, established firms will always seek to achieve the highest profit margins and will be happy to give up low margin, low end market segments to new entrants. Once the new entrants use a low cost strategy to win market segments, they will, for the same reasons, need to move up market and will continue to erode the market segments of the incumbent firm.
In the videos below, Christensen describes the basics of disruptive innovation and answers the question: “what kills successful companies?” His research has shown that principles of good management sow the seeds of failure.
If you do everything right, you are doomed.
In every market there are high end-very demanding customers which cannot be satisfied and low end customers who are overserved by almost nothing. In every industry, there is a trajectory of improvement which customers can use; however, innovating companies provide another trajectory which is faster than customers can use the improvement. These dramatic innovations help leaders sell more product to best customers and sustain market position of leaders. Many companies disrupted incumbents by bringing to market a product that wasn’t as good, but more affordable and simpler and easier to use.
Here Christensen describes the steel industry case study included in The Innovator’s Dilemma which illustrates an example of an industry which was disrupted in successive waves by low-end competitors (mini-mills).
Next, Christensen describes other examples of low-end disruptors such as Toyota, which started with sub-compact cars in the US market and then ended up manufacturing the Lexus brand.